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Economy in Brief

Euro Area IP Falls for the Second Month in a Row
by Robert Brusca  May 12, 2016

EMU economic data continues to show spotty results. Industrial production for the euro area in March is now tabulated, showing a drop of 0.8%. Output is still higher in the quarter even after two straight months of IP declines because in January IP had spurted by 2.4%. Still, output is down for two months running overall and in all categories except intermediate goods, where output in February has risen by 0.1%.

The strong Q1 growth figures are really misleading

In the just-completed quarter, overall IP is up at a 3.8% annual rate. Manufacturing IP is up at a 4.3% annual rate. Capital goods output is up at a huge 8% annual rate followed by consumer nondurables at a 5.3% pace and intermediate goods at a 4% pace. All the growth in Q1 was front-loaded as output jumped in January. As the quarter has progressed, output has receded to the point where March output indices sit well below their respective Q1 averages. This spells trouble for Q2 growth. The relationship between the level of the output index in the last month of the quarter and the quarterly average gives us a view of inherited growth; what trend is doing as we get ready for the next quarter. Consider these metrics: for overall IP, output is falling at a 10.5% annual rate in March compared to its quarterly average. For consumer goods, the drop is at a minus 21% annual rate. For capital goods, the drop is at a -22.9% annual rate. For Germany, the drop is at a -11.8% annual rate. The `strong-looking' Q1 growth rate of IP growth hides a whole lot of hurt that has built up heading into Q2. Q1 is no growth launching pad.

Very uneven growth and a weak pace to boot

Of the 13 EMU and EU-only members in the table, at least seven show manufacturing IP drops in March and in February as well as drops by seven countries over three-month, six-month and 12-month. There is clear ongoing weakness and uneven growth in the euro area. Manufacturing IP growth in the EMU is at an annual rate of 0.5% or less over 12-month, six-month and three-month. This is very low flying growth and clearly flirts with stall-speed and hitting the tree tops.

Really? Stall-speed risk?

The recently released OECD leading indicators reinforce this notion of weakness and of stall-speed danger. For the OECD region, the key adjusted LEI indicators have values below 100 and lower on balance over six months, the preferred horizon for interpreting OECD trends. The U.S., the U.K., Japan, and China each have local LEI readings below 100 - a flag for slowing growth - and each is lower on balance over the last six months, indicating that further slowing is in train. Only the EMU region has an OECD index above 100, but even for the EMU there is slowing indicated on balance over the last six months.

The slowing story resonates across indicators

There is an apparent slowing in EMU growth brewing as Q1 ends. The spike in January growth helps to dress up the case for a subsequent slowing, of course, but there is also weakness in February and March output. And the year-over-year momentum is poor. The OECD area shows ongoing slowing trends for the region as a whole as well as for all members with most showing weak absolute readings on their trend-restored indicators in addition of failing rates of growth for them. PMI gauges have slowed as well. In a broad group of 18 countries or economic units globally, PMIs slow from three-month to six-month in all but three and over six-month compared to 12-month for all but five. Slowing is not a figment of your imagination of confined to a few unimportant reports.

EMU remains well below its mandated inflation pace

Price in the EMU continues to be weak and well below trend. The U.K. has been pulled into the weakness vortex as its IP has slowed and its PMI gauges have notched down. The BOE is warning that sterling as well as growth overall could be harmed if the decision in favor of Brexit is adopted. Meanwhile, the BOE itself is keeping policy steady although it has reduced its outlook for growth. The Bundesbank's Executive Board member Andreas Dombret said Wednesday that ECB policy was adequate- even though it is not producing results. Bundesbank members have mostly been warning that the ECB has overstepped reasonable bounds. Dombret's position acquiesces to current policy, but he warns that prolonged periods of low interest rates can have side effects. Dombret also manages to refer to the current situation as one with modest inflationary pressures that justify current policy. This seems to be a backhanded observation that downplays the current weak state of growth and inflation. The targeted HICP is lower by 0.2% year-over-year compared to a target rate of just under +2%. The core rate (not targeted) is up by just 0.7% year-on-year. The year-on year HICP headline has been below target for 38-months in a row- three whole years and running- and the ECB is still not closing in on their goal. It is some `modest' inflationary period, isn't it? The Germans come from Mars, the rest of the EMU members from Venus, Neptune, and Uranus. No wonder the Germans see things differently, no one is in their orbit.

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